According to his preferences, Peter will always be willing to give up 10 ounces

Question

According to his preferences, Peter will always be willing to give up 10 ounces beer for 1 ounce of cheese. Paul, on the other hand, has preferences by which he will always give up 10 ounces of cheese for 1 ounce of beer. According to this information, please answer the following: a. What is the characteristic of Peter’s preferences? Do they exhibit a diminishing marginal rate of substitution between cheese and beer? Please explain, why or why not? b. Now let’s assume that Peter and Paul have the same money income to spend on both beer and cheese. Please determine who will purchase the most beer and why?

Explanation / Answer

Peter is willing to give up 10 ounces of beer to 1 ounce of cheese, This means peter does not like beer that much, He loves cheese.

Paul is ready for beer he will give up 10 ounces of cheese to 1 ounce of beer, That means paul really loves beer.

The data given does not suggest they exhibit a dimnishing marginal returns, because only one parameter is given, 10 to 1, If parameters were different we could have known if dimnishing marginal returns is happening or not.

We have already discussed that paul loves beer, So he is the one who will buy most beer, Peter on other hand is ready to give up beer so he wont buy.

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